The impact of fiscal decentralization and market transition on local public finance in China: fiscal inadequacy and unmet social security needs

Zeng, H.Y.;
(2010)
The impact of fiscal decentralization and market transition on local public finance in China: fiscal inadequacy and unmet social security needs.
Doctoral thesis , UCL (University College London).

Abstract

One of the frequently observed issues related to fiscal decentralisation in developing
and transition countries is that subnational governments may not have adequate
resources to finance the expenditure responsibilities decentralised to them. This often
results in expenditure needs not being met in poorer areas. In China, fiscal
decentralisation has taken place in an extreme form, where the social security
responsibility, a conventional central government function, has been devolved to
subnational governments during the fiscal reforms.
While existing studies have anatomised the problem of unmet fiscal needs in poorer
areas of China using economic and political economy theories of fiscal federalism,
they tend to under-estimate or neglect the fiscal needs induced by market
transition—the increasing demand for social security by workers from state and
non-state sectors since the mid-late 1990s. This research illustrates that excess fiscal
decentralisation, as in the case of China, could also create serious fiscal burdens for
relatively affluent local areas and generate unmet social security needs in these
localities. It is discovered that in response to the emerging social security burdens,
even the relatively affluent local governments are forced to adopt measures that may
counter the intent of social benefit programs or produce other detrimental
consequences.
In addition, this dissertation applies statistical analysis to ascertain a few inconclusive
issues raised by the China-specific literature. It is perceived that the negative
correlation between the share of consolidated provincial budgetary spending on social
security and health sector has become stronger and more significant in more recent
time. This suggests that the expansion of social security expenses at subnational levels
might have bid away budgetary resources for health. The result from the multiple
regression analysis indicates that the degree of market transition has explanatory
power on the size of provincial government, even when a number of other
independent variables are controlled for. However, the explanatory power of market
transition on the size of central-provincial fiscal transfer is not robust.

Type:

Thesis
(Doctoral)

Title:

The impact of fiscal decentralization and market transition on local public finance in China: fiscal inadequacy and unmet social security needs